Ports list in murky waters

After being beaten to the bourse by Xiamen and Dalian, Tianjin’s saga to list its port operator on the Hong Kong Stock Exchange finally met with success on May 24.

Tianjin Port Development Holdings, the largest operator in China’s largest international port, saw the retail tranche of its Hong Kong initial public offering (IPO) oversubscribed by a record 1,703 times. The company raised US$139 million and shares surged 26.3% on its trading debut. The surge wasn’t surprising since the listing opens up many possibilities for China’s import and export processing system.

Container traffic through Chinese ports is growing 30% per year and the government has made the expansion of Tianjin port an integral part of the 11th Five-Year Plan to develop north China’s Bohai Sea Rim and make it a third economic engine after the Pearl and Yangtze River Deltas.

By 2010, Beijing expects the country will be able to move 120-140 million teus (twenty-foot container equivalent units).

The boom in port construction is racing against the country’s red-hot economy and the surge in both imports and exports. Some ports have had to deal with logjams, leading authorities to begin calling for more diversified investments to fund new harbour developments.

Tianjin’s IPO was one of a series of mainland offerings that have attracted attention and support from investors looking for quick profits. Tianjin was unique, however, in that its long road to the stock market underlined the hazards investors face in government spin-off listings.

The port, a unit of conglomerate Tianjin Development Holdings (TDH), intends to invest US$3.4 billion by 2010 in 30 ongoing construction projects, enabling the northern China port city to handle 300 million tonnes of commodities, said an official with the Ministry of Commerce.

Dogged by delays

Tianjin is China’s third port operator to go public despite being among the first to win preliminary approval back in November. The IPO was delayed twice and some analysts expected it to be delayed a third time in February after questions arose over irregular trading on parent company shares.

A statement by TDH said it had noticed increased trading volumes in the company’s shares but the board were mostly unaware of any reason for the increase.

One transaction it knew about was an off-market disposal of 15 million shares by Tsielien Group, a controlling shareholder. (In September 2001, Tsienlien Group and Tianjin Investment, two big shareholders of TDH, pleaded guilty to failing to report disposals and acquisitions of 662,000 and 1,824,000 shares respectively.)

Added to the mixture have been anxious feelings about China’s own exchanges in Shanghai and Shenzhen. Neither is as popular as Hong Kong as a vehicle for forcing state-owned enterprises to embrace free-market capitalism.

"The problem is, [accountability] is not as clear cut as the mentality you have in the West. ? Even though on paper there may be no connection [between entities], in fact there may be a strong influence indirectly or through other channels," said Patrick Wong, underwriter for TT Club, one of the industry’s leading providers of insurance and risk management services during the 3rd Trans Asia Shipping Conference in Dalian in April.

Even though some China fund managers brag of up to 30% gains on China IPO investments in the last six months, including a 60% gain on Dalian Port, which listed in April, many investors believe such gains are only viable if they get in early on a hot IPO and time it well. For longer-term investors, the picture is different.

In recent years China boards have done little to impress upon state-owned enterprises the notion of enhancing shareholder value with mainland stock markets virtually halving in value since a brief peak in 2001 – at the same time China’s economy has grown by more than 50%.
In many cases the largest companies in China’s state-owned pillar sectors – such as energy, finance and telecommunications – sell investors a small stake while the government maintains control of the boards. Recent dividend yields have been paltry, with only two of China’s 10 largest Hong Kong IPOs paying out more than 2.7%.

Ownership issues

One aspect of Chinese state-backed offerings which worries many institutional investors is murky ownership. Principal operation of the Tianjin port is currently divided between Tianjin Port Company Ltd and Tianjin Port Development Holdings. Both are ostensibly owned by the Tianjin Municipal Government. However, both entities are administered by Tianjin Municipal Port Authority, which the municipal government owns.

"Operation of Tianjin Port itself has already been effectively divided into separate entities. Of these, Tianjin Port has already been floated successfully on the Shanghai stock exchange," said Huang Lijun, Vice President of Tianjin Port Company, rebuffing any notion of a conflict of interest between the bodies.

It is unclear exactly why the Hong Kong bourse’s listing committee rejected the first two Tianjin Port listing applications and requested more data. Sources have suggested the committee required clarification of the relationship between the two port operating companies to allay fears the floatation would hurt Tianjin Development minority shareholders.

Furthermore, the fact that Tianjin only spun off certain assets raises the question in many investors’ minds: "what are we really buying?"

But the opacity of the industry has done little to deter some investors who are drawn to growing trade. Mohammad Sharaf, CEO of Dubai Ports World, said his company is "always looking for opportunities. We are interested in everything." DP World – recently embroiled in the US port takeover debacle – operates a two-berth facility in Tianjin.

Amid the scramble for expansion some have pointed to a potential glut in capacity but Sharaf believes no such glut is on the horizon. "Some people say there is overcapacity now. But how about the future? China is the world’s fastest growing economy. We don’t want to be out of it. We want to be part of the economy that is growing the fastest," Sharaf said.

"We want to be a part of the supply chain both sides, in the East and the West. China is one focus point and Europe is another. This is where the global trade is happening"

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